SBA Lending 2019 Update: Guidance on the Latest Changes to Policies, Procedures & Documentation WPASGL Quality Circle 2019 03/04/10

AGENDA Updated SBA Forms New Boilerplate Authorization New SBA Form159 SOP 5010(5)(k) Highlights Small Business 7(a) Lending Oversight Reform Act Proposed Rule OCRM Findings © 2014, Starfield & Smith, P.C., All Rights Reserved

Updated SBA Forms Updated program forms – SBA Notice 5000-17007 (dated 10/12/2017) 1919 – Borrower Information Form 1920 – Lender’s Application for Loan Guaranty 1971 – Religious Eligibility Worksheet 2449 – Community Advantage Addendum 2237 – 7(a) Loan Post Approval Checklist (information now submitted electronically via E-Tran/SBA One) New Form 4506-T (7/2017)

Updated SBA Forms (cont.) SOP 5010(5)(K) Effective 4/1/2019 Updated 2018 SBA Loan Authorization Effective 8/2018 Updated SBA Form 159 Effective 10/1/2018 Updated Form 413

Highlights of Updated SBA 7(a) Loan Authorization effective 8/2018

SBA Loan Authorization Issued 8/2018 Mandatory language provided for Lender using own Note Must comply with the repayment terms set forth in Loan Authorization Must ensure the Note is legally enforceable and assignable Must state maturity and is not payable on demand. The Note must include the following language: "When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. Lender or SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law."

SBA Loan Authorization Issued 8/2018 (cont.) Interest Rate Options revised Mandatory State Specific Language added for GA, OR, and WA Raised the amount allowed to be disbursed for working capital instead of listed purposes from 10% or $10,000, whichever is less, to 20% or $50,000, whichever is less Added that an EPC may not receive funds to be used for the purchase of any assets, including intangible assets, for use by the OC

SBA Loan Authorization Issued 8/2018 (cont.) SBA Form 1050 is required (except Express, Export Express or 7(a) Small Loans) Clarify lender may use its own guaranty form and provide additional information Revised the language providing direction to Lenders when flood insurance coverage is not obtained for personal property collateral to conform to SOP 50 10 Revised the language for insurance coverage to match SOP 50 10

SBA Note – First Change Period Must identify initial adjustment period for variable rates loans. The interest rate will be adjusted every calendar quarter (the “change period”), beginning April 1, 2019

Highlights of Updated SBA Form 159 effective 10/1/2018

SBA Form 159 SBA Information Notice 5000-18012 To ensure that Applicants are “fully informed of all fees being charged” in connection with obtaining a loan Disclosure of Agents and fees paid required by statute and regulations Required when packaging/other services are provided If no services provided or no fees – Form 159 is not required

SBA Form 159 If the Lender charges a packaging fee to the Applicant and the Agent charges a referral fee to the Lender: Lender and Applicant complete Form 159 for the packaging fee; the Agent, the Lender and the Applicant complete Form 159 for the referral fee

SBA Form 159 – Documentation Over $2,500 Detailed description of the work performed and Hourly rate and number of hours spent working on each activity When fee is $2,500 or less, SBA still requires documentation showing what services were actually performed but an hourly breakdown is not required

7(a) Fees for FY 2019 Ongoing Guaranty Fee (Annual Servicing Fee) is 0.55% of the guaranteed portion of the outstanding principal balance. Upfront Guaranty Fee: FY 19 Authorized Fee Relief: 7(a) loans < $150,000 made to businesses in rural areas or HUBZones: Upfront Guaranty fee is 0.6667% of the guaranteed portion Ongoing Guaranty Fee will be zero Per previous legislative change – since program at zero subsidy, guaranty fee reduced to zero on SBA Express loans made to eligible veterans/spouses Note: Lenders may retain 25% of any upfront guaranty fee collected on loans of $150,000 or less. 7(a) Loan Amount % of Guaranteed Portion < $150,000 2% > $150,000 and < $700,000 3% > $700,000 to $5,000,000 3.5% of first guaranteed plus 3.75% of guaranteed portion > $1,000,000

Highlights of SOP 50 10(5)(K) effective 4/1/2019

Operating under Multiple Agreements Review all Agreements If meets the FTC definition of Franchise must be listed in the Franchise Directory If Agreement is Critical, must obtain SBA addendum Critical means 50% or more of Applicant’s revenue (aggregate of multiple agreements)

FTC - Franchises Franchise must meet the Federal Trade Commission (“FTC”) definition of “franchise” in 16 CFR §436 Right to operate or associate with Franchisor’s Trademark or sell TM inventory Franchisor exercises significant degree of control or provide significant assistance To operate or begin operations make or commit to make payments to Franchisor

FTC – Franchises (cont.) All agreements and relationships that are covered by the Petroleum Marketing Practices Act (PMPA), 15 U.S.C. 2801 (e.g., gas stations) are considered FTC New car dealer agreements no longer excluded, but subject to FTC/SBA franchise rules

SBA Franchise Directory Eligible Franchises listed in NEW SBA Franchise Directory (see link list) Franchise Identification Code (FIC) entered in Etran/SBA One Identifies if SBA Addendum or Negotiated Addendum needed If not on SBA Franchise Directory, not SBA eligible franchise

Procedure to add Franchise to Franchise Directory: Submit Franchise Agreement, Franchise Disclosure Document (FDD), if applicable, and all other signed franchise documents to franchise@sba.gov If SBA Addendum (SBA Form 2462), eligibility determination only If negotiated addendum, affiliation and eligibility determination and need to submit Annual Franchisor Certification to SBA

Affiliation by Management Affiliation exists: When officers, managers or shareholders control management of applicant and also controls the management of one or more other concerns When individual or company controls Board of applicant and one or more other concern’s Board When individual or company controls applicant through a Management Agreement

Review of Management Agreements Management Co’s sole discretion over business activities – Affiliation Applicant’s “meaningful oversight” over management activities – No Affiliation Approval of Budget Approval of Cap Ex over $ threshold Control over Business Accounts Oversight of Employees

Credit Elsewhere Test Applicant does not have the ability to obtain some or all of the requested loan funds on reasonable terms from non-government sources, including from the Lender, without SBA assistance.

Credit Elsewhere Test (cont.) Liquidity of 20% or more owners of Applicant, their spouses and minor children, and the Applicant itself; or Conventional lenders or other non-Federal, non-State, or non-local government sources of credit (consider commitment to help in a default) Lender must substantiate factors and retain the explanation in its loan file.

Residential Facilities Residential Facilities that do not provide healthcare and/or medical services are NOT eligible. Licensed nursing homes and assisted living facilities are OK

Marijuana-Related Businesses NOT Eligible: Direct Marijuana Business - grow, process, distribute or sell marijuana products- medicinal or recreational Indirect Marijuana Business – Derives any of its gross revenue for previous year from sales of products or services to DMB (i.e. install equipment, advise or counsel, sell products intended to market to marijuana users) Hemp business is OK Must have certification that during life of Loan, Borrower will not lease to business that is engaged in illegal activities

New Borrower Certification Section 10.b.(10). Leasing—During the life of the loan, the real estate pledged as Collateral for the Loan or where the Borrower or Operating Company conducts its business operations will not be leased to or occupied by any business that Borrower or Operating Company knows is engaged in any activity that is illegal under federal, state or local law or any activity that can reasonably be determined to support or facilitate any activity that is illegal under federal, state, or local law.

Debt Refinancing Debt refinancing for Change of Ownership: Change from 6 to 12 months for financial institution or other third party Must supply supporting documents for all refinancing and keep in file 28

Equity Injection – Start-up Start-Up businesses – Applicant contribution of at least 10% of the total project costs (all costs required to become operational, regardless of the source of funds)

Equity Injection – Change of Ownership New Owner – at least 10% of the total project costs (all costs required to complete the change of ownership, regardless of the source of funds) to be necessary for such transactions. Partner Buyout - Pro-forma equity position after transaction of at least 10% of total assets OR remaining owners contribute equity injection – resulting in at least a 10% net worth (maximum pro forma debt-to-worth ratio of 9:1). Must prove equity injection regardless of Size loan

Seller Debt – Change of Ownership Seller debt NOT equity injection unless FULL standby for term of Loan and does not exceed half of the required equity injection;

Clarification on Loan Maturity Mixed Use of Proceeds requires a blended Maturity Rate, unless 51% of proceeds used for CRE Leasehold improvements –10 years, plus reasonable period to complete leasehold improvements up to 12 months Express LOC Loans – Maturity can be extended to 10 years, but term out can not be less than revolving period. Can be annual renewal, but no annual charge and must meet requirements above for maturity

Disclosure of Ownership For all loans: 100% of the Applicant’s ownership must be disclosed on SBA form 1919; and Identify each individual owner in E-tran Pre-close/Post-approval: Must obtain SBA’s prior written consent for any proposed adjustment to ownership (including percentage) Post-Disbursement: Lender may not unilaterally approve any adjustment to or change in ownership of a Borrower, including a change in percentage of ownership for 12 months after final disbursement on any loan

Post-Approval/Pre-Disbursement Changes of Ownership For all loans: Lender must discloser 100% of the Applicant’s ownership on SBA form 1919; and Identify each individual owner in E-trans

Proposed Rule Proposed Rule published in Federal Register on 9/27/2018 [deadline for comments was 12/19/18] Contains a number of possible significant changes, including: Requirements related to considering – as part of Credit Elsewhere determination – personal liquid assets of owners of 20% or more of a loan applicant Requirements regarding allowable fees charged to 7(a) borrowers Amendments to affiliation requirements for SBA’s financial assistance program

Small Business 7(a) Lending Oversight Act for Lenders Became law 6/21/2018 Codifies OCRM’s authority to propose and implement Enforcement Actions Calls for a New Regulation to be promulgated by June of 2019 Provides authority for OCRM to assess Civil Monetary Penalties Requires SBA to provide lenders with their review report within 60 days of conclusion of review

OCRM – Top Findings for 7(a) Loans SBA Form 159 Deficiencies (Evidence of Submission/Incorrect Form Utilized/Inaccurate or Incomplete Preparation) Prohibited Fees Charged to Borrowers Deficiencies in Pro-forma Balance Sheet and Ratio Calculations Collateral Lien Deficiencies Inadequate Credit Elsewhere Test Documentation Debt Refinancing Conditions not Met EPC/OC Conditions not Met Inadequate Documentation for Equity Injection IRS Tax Transcripts (Not Obtained and/or Reviewed)

Thanks! www.starfieldsmith.com Kimberly A. Rayer, Esq. krayer@starfieldsmith.com 1300 Virginia Drive Suite 325 Ft. Washington, PA 19034 P: 267-470-1208 F: 215-534-9023 1101 North Lake Destiny Road, Suite 105 Maitland, FL 32751 P: (407) 667-8811 F: (407) 667-0020 www.starfieldsmith.com